At least once a week I am asked by a prospective client if we are a recourse or a non-recourse factoring company, and what the difference between the two is.
Fast A/R Funding is a recourse factoring company.
In our industry the term recourse needs a little explanation. The term recourse applies to whether or not the factoring company takes the financial risk of its factored client's customers. A simple example is if we have a client that designs and distributes women's shoes. The shoe company sells to various retailers across the country on 30 day terms. If one of those retailers does not pay its bill because of financial inability, as a recourse factoring company, our client is still responsible to us for the advance we made against the invoice. If a non-recourse factoring company had approved the retailer and that retailer went bankrupt, the client would not be responsible to the factoring company for the payment of the invoice.
All things being equal, if I was a client looking for a factoring company it seems logical to me that I would be better off with a non-recourse factoring facility, but there are a few things that are important to understand about non-recourse facilities.
- Factoring companies are not likely to approve all your customers for non-recourse factoring. Because a factoring company will be taking the financial risk of your customers in a non-recourse relationship, they are careful to only approve the customers they feel have the financial ability to pay their debts when they become due. Becuase of this, they will not approve customers that they are not able to receive financial information on or if the information they receive is at all negative.
- Even if the customer is approved for non-recourse status, the factoring company does not take "dispute risk" in a non-recourse relationship. This means that if the retailer in our example above doesn't pay the bill for any reason other then financial inability, the factoring company does in fact have recourse to its factored client for the advances they made.
- Recourse or non-recourse has nothing to do with wether the factoring company receives a personal guaranty from the owner of its factored client. Generally, all factoring companies that specialize in financing small businesses will require a personal guaranty from the owners of the business without regard to whether the facility is recourse or non-recourse.